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Fingerprints: There are no two alike. So it should be with your wealth management plan. Taking a boilerplate approach could prevent you from achieving your specific goals. Here are some key points to consider when devising a plan that’s all your own.

Many variables

For your plan to be as unique as you, it should reflect variables such as:

Age,
Health status,
Risk tolerance, and
How you plan to use your assets now and going forward.

Risk tolerance is a particularly important point. Some people are naturally more willing to risk a loss for the opportunity of a larger gain. Others are uncomfortable with any possibility of loss even though this certainty may mean a lower potential return.

But risk tolerance also may be affected by age. If you’re retired or close to retirement, for example, a more conservative approach to investing, saving and spending is likely appropriate. By contrast, if you’re several decades away from retirement, you’ll more likely benefit from taking at least a few carefully considered chances to build wealth and keep ahead of inflation.

Withdrawal strategy

Another important component of a personal wealth management plan is your withdrawal strategy. For example, if you’re close to retirement, you need to withdraw from your accounts carefully to avoid having insufficient funds during retirement. Withdraw too little, however, and you could miss opportunities to enjoy life. (You also could face severe tax penalties if you don’t take required minimum distributions.)

Like your wealth management plan, your withdrawal strategy will be highly personal. The amount of income you’ll need in retirement will depend on your priorities. If you’re planning to travel extensively, your needs will be very different from what they’ll be if your primary goal is to stay close to home to spend more time with your family.

If you own assets in a variety of tax-free (such as a Roth IRA), tax-deferred (such as a 401(k) plan or traditional IRA) and taxable savings vehicles, there can be some significant tax implications to how you withdraw your assets. Conventional wisdom says that taxable assets should be withdrawn first, leaving your tax-advantaged holdings more time to grow. This approach may work in some situations, but it’s not necessarily the correct approach for everyone. (And minimum annual distributions are required from certain tax-advantaged accounts, generally after age 70½.)

Necessary help

Your wealth management plan should be carefully designed and maintained to suit the many distinctive elements of your life. But that doesn’t mean you must go about it alone. Please contact our firm for help not only creating a plan, but also checking in on it regularly to see whether any adjustments are necessary.

Sidebar: Don’t forget about estate planning

If your net worth is large enough that estate taxes are a concern, making annual gifts can be a surprisingly powerful way to reduce your taxable estate. In fact, making annual gifts can help you accomplish two important goals: removing assets from your estate and passing along assets to loved ones. Current federal law allows annual tax-free gifts of $15,000 per recipient per year ($30,000 for married couples).

Just make sure your gifting strategy is well integrated into your overall estate plan. Such a plan might also involve trusts and other mechanisms for distributing your wealth.

S corporations can provide tax advantages over C corporations in the right circumstances. This is true if you expect that the business will incur losses in its early years because shareholders in a C corporation generally get no tax benefit from such losses. Conversely, as an S corporation shareholder, you can deduct your percentage share of these losses on your personal tax return to the extent of your basis in the stock and any loans you personally make to the entity.

Losses that can’t be deducted because they exceed your basis are carried forward and can be deducted by you when there’s sufficient basis.

Therefore, your ability to use losses that pass through from an S corporation depends on your basis in the corporation’s stock and debt. And, basis is important for other purposes such as determining the amount of gain or loss you recognize if you sell the stock. Your basis in the corporation is adjusted to reflect various events such as distributions from the corporation, contributions you make to the corporation and the corporation’s income or loss.

Adjustments to basis

However, you may not be aware that several elections are available to an S corporation or its shareholders that can affect the basis adjustments caused by distributions and other events. Here is some information about four elections:

An S corporation shareholder may elect to reverse the normal order of basis reductions and have the corporation’s deductible losses reduce basis before basis is reduced by nondeductible, noncapital expenses. Making this election may permit the shareholder to deduct more pass-through losses.
An election that can help eliminate the corporation’s accumulated earnings and profits from C corporation years is the “deemed dividend election.” This election can be useful if the corporation isn’t able to, or doesn’t want to, make an actual dividend distribution.
If a shareholder’s interest in the corporation terminates during the year, the corporation and all affected shareholders can agree to elect to treat the corporation’s tax year as having closed on the date the shareholder’s interest terminated. This election affords flexibility in the allocation of the corporation’s income or loss to the shareholders and it may affect the category of accumulated income out of which a distribution is made.
An election to terminate the S corporation’s tax year may also be available if there has been a disposition by a shareholder of 20% or more of the corporation’s stock within a 30-day period.

Contact us if you would like to go over how these elections, as well as other S corporation planning strategies, can help maximize the tax benefits of operating as an S corporation.

At the close of each year, businesses should update the financials in their business plan. A solid business plan will comprise of six sections: executive summary, business description, industry and marketing analysis, management team description, implementation plan, and financials.

Now, ideally, you would comprehensively update each section every year. But if the size, shape and objectives of your company haven’t changed all that much, you may not need to make major revisions to the entire plan. However, at the very least, you should always review and revise your financials.

Explain your route

Lenders, investors and other interested parties understand that descriptions of a business or industry analysis may be subject to interpretation. But financials are a different matter — they need to add up (literally and figuratively) and contain realistic projections in today’s dollars.

For example, suppose a company with $10 million in sales in 2019 expects to double that figure over a three-year period. How will you get from Point A ($10 million in 2019) to Point B ($20 million in 2023)? Many roads may lead to the desired destination; your business plan must explain its route.

Let’s say your management team decides to double sales by hiring four new salespeople and acquiring the assets of a bankrupt competitor. These assumptions will drive the projected income statement, balance sheet and cash flow statement referenced in your business plan.

Justify assumptions

When projecting the income statement, you’ll need to make assumptions about variable and fixed costs. Direct materials are generally considered variable. Salaries and rent are usually fixed. But many fixed costs can be variable over the long term. Consider rent: Once a lease expires, you could relocate to a different facility to accommodate changes in size.

Balance sheet items — receivables, inventory, payables and so on — are generally expected to grow in tandem with revenues. The financials in your business plan must accurately and reasonably justify the assumptions you’re making about your minimum cash balance, as well as debt increases or decreases to keep the balance sheet balanced. And these amounts must be current.

From a lending perspective, your bank will be expected to fund any cash shortfalls that take place as the company grows. So, realistic cash flow projections in your business plan are particularly critical. The financials section should outline how much financing you’ll need, how you intend to use those funds and when you expect to repay the loan(s).

Keep it fresh

Your business plan needs to tell an accurate, objective story of your company — where it’s been, where it is right now and where it’s heading. Keep the whole thing as fresh as possible but pay special attention to the numbers. We can help you review your financials, arrive at reasonable assumptions, and express your objectives and projections clearly.

Everyone needs to plan for retirement. But as a business owner, you face a distinctive challenge in that you must save for your golden years while also creating, updating and eventually executing a succession plan. This is no easy task, but you can put the puzzle pieces together by answering some fundamental questions:

When do I want to retire? This may be the most important question regarding your succession plan, because it’s at this time that your successor will take over. Think about a date by which you’ll be ready to let go and will have the financial resources to support yourself for your postretirement life expectancy.

How much will I need to retire? To maintain your current lifestyle, you’ll likely need a substantial percentage of your current annual income. You may initially receive an influx of cash from perhaps either the sale of your company or a payout from a buy-sell agreement.

But don’t forget to consider inflation. This adds another 2% to 4% per year to the equation. If, like many retirees, you decide to move to a warmer climate, you also need to take the cost of living in that state into consideration — especially if you’ll maintain two homes.

What are my sources of retirement income? As mentioned, selling your business (if that’s what your succession plan calls for) will likely help at first. Think about whether you’d prefer a lump-sum payment to add to your retirement savings or receive installments.

Of course, many business owners don’t sell but pass along their company to family members or trusted employees. You might stay on as a paid consultant, which would provide some retirement income. And all of this would be in addition to whatever retirement accounts you’ve been contributing to, as well as Social Security.

Am I saving enough? This is a question everyone must ask but, again, business owners have special considerations. Let’s say you’d been saving diligently for retirement, but economic or market difficulties have recently forced you to lower your salary or channel more of your own money into the company. This could affect your retirement date and, thus, your succession plan’s departure date.

Using a balance sheet, add up all your assets and debts. Heavy spending and an excessive debt load can significantly delay your retirement. In turn, this negatively affects your succession plan because it throws the future leadership of your company into doubt and confusion. As you get closer to retirement, integrate debt management and elimination into your personal financial approach so you can confidently set a departure date. We can help you identify all the different pieces related to succession planning and retirement planning — and assemble them all into a practical whole.

Merging with, or acquiring, another company is one of the best ways to grow rapidly. You might be able to significantly boost revenue, literally overnight, by acquiring another business. In contrast, achieving a comparable rate of growth organically — by increasing sales of existing products and services or adding new product and service lines — can take years.

There are, of course, multiple factors to consider before making such a move. But your primary evaluative objective is to weigh the potential advantages against the risks.

Does it make sense?

On the plus side, an acquisition might enable your company to expand into new geographic areas and new customer segments more quickly and easily. You can do this via a horizontal acquisition (acquiring another company that’s similar to yours) or a vertical acquisition (acquiring another company along your supply chain).

There are also some potential drawbacks to completing a merger or acquisition. It’s a costly process from both financial and time-commitment perspectives. In a worst-case scenario, an ill-advised merger or acquisition could spell doom for a business that overextends itself financially or overreaches its functional capabilities.

Thus, you should determine how much the transaction will cost and how it will be financed before beginning the M&A process. Also try to get an idea of how much time you and your key managers will have to spend on M&A-related tasks in the coming months — and how this could impact your existing operations.

You’ll also want to ensure that the cultures of the two merging businesses will be compatible. Mismatched corporate cultures have been the main cause of numerous failed mergers, including some high-profile megamergers. You’ll need to plan carefully for how two divergent cultures will be blended together.

Can you reduce the risks?

The best way to reduce the risk involved in buying another business is to perform solid due diligence on your acquisition target. Your objective should be to confirm claims made by the seller about the company’s financial condition, clients, contracts, employees and management team.

The most important step in M&A due diligence is a careful examination of the company’s financial statements — specifically, the income statement, cash flow statement and balance sheet. Also scrutinize the existing client base and client contracts (if any exist) because projected future earnings and cash flow will largely hinge on these.

Finally, try to get a good feel for the knowledge, skills and experience possessed by the company’s employees and key managers. In some circumstances, you might consider offering key executives ownership shares if they’ll commit to staying with the company for a certain length of time after the merger.

Who can help?

The decision to merge with another business or acquire another company is rarely an easy one. We can help you perform the financial analyses and project the tax implications of any prospective deal to bring the idea better into focus.

Can your business become more profitable without venturing out of its comfort zone? Of course! However, adding new products or services may not be the best way for your business — or any company — to boost profits. Bottom-line potential may lie undiscovered in your existing operations. How can you find these “hidden” profits? Dig into every facet of your organization.

Develop a profit plan

You’ve probably written and perhaps even recently revised a business plan. And you’ve no doubt developed sales and marketing plans to present to investors and bankers. But have you taken the extra step of developing a profit plan?

A profit plan outlines your company’s profit potential and sets objectives for realizing those bottom-line improvements. Following traditional profit projections based on a previous quarter’s or previous year’s performance can limit you. Why? Because when your company reaches its budgeted sales goals or exceeds them, you may feel inclined to ease up for the rest of the year. Don’t just coast past your sales goals — roar past them and keep going.

Uncover hidden profit potential by developing a profit plan that includes a continuous incentive to improve. Set your sales goals high. Even if you don’t reach them, you’ll have the incentive to continue pushing for more sales right through year end.

Ask the right questions

Among the most effective techniques for creating such a plan is to consider three critical questions. Answer them with, if necessary, brutal honesty to increase your chances of success. And pose the questions to your employees for their input, too. Their answers may reveal options you never considered. Here are the questions:

1. What does our company do best? Involve top management and brainstorm to answer this question. Identifying your core competencies should result in strategies that boost operations and uncover hidden profits.

2. What products or services should we eliminate? Nearly everyone in management has an answer to this question, but usually no one asks for it. When you lay out the tough answers on the table, you can often eliminate unprofitable activities and improve profits by adding or improving profitable ones.

3. Exactly who are our customers? You may be wasting time and money on marketing that doesn’t reach your most profitable customers. Analyzing your customers and prospects to better focus your marketing activities is a powerful way to cut waste and increase profits.

Get that shovel ready

Every business owner wishes his or her company could be more profitable, but how many undertake a concerted effort to uncover hidden profits? By pulling out that figurative shovel and digging into every aspect of your company, you may very well unearth profit opportunities your competitors are missing. We can help you conduct this self-examination, gather the data and crunch the resulting numbers.

Many companies now offer Health Reimbursement Arrangements (HRAs) in conjunction with high-deductible health plans (HDHPs). HRAs offer some advantages over the perhaps better-known HDHP companion account, the Health Savings Account (HSA). If you’re considering adding an HRA, you might assume that, as a business owner, you can participate in the HRA. But this may not be the case.

Following the rules

Whether an owner can participate in his or her company’s HRA depends on several factors, including how the company is organized and the amount of the business owned by each working owner. Tax-free benefits under an HRA can be provided only to:

Current and former employees (including retirees), and their spouses,
Covered tax dependents, and
Children who haven’t attained age 27 by the end of the tax year.

Owners who are “self-employed individuals” within the meaning of Internal Revenue Code Section (IRC) 401(c) aren’t considered employees for this purpose and aren’t allowed to participate in an HRA on a tax-favored basis.

Defining the self-employed

Generally, a self-employed individual is someone who has net earnings from self-employment as defined in IRC Sec. 1402(a), accounting for only earnings from a trade or business in which the “personal services of the taxpayer are a material income-producing factor.” Ineligible owners include partners, sole proprietors and more-than-2% shareholders in an S corporation. Stock ownership by employees of a C corporation doesn’t preclude their tax-favored HRA participation.

The ownership attribution rules in IRC Sec. 318 apply when determining who’s a more-than-2% shareholder of an S corporation, so any employee who’s the spouse, child, parent or grandparent of a more-than-2% shareholder of an S corporation would also be unable to participate in the S corporation’s HRA on a tax-favored basis. A disqualified individual (whether because of direct or attributed ownership) could, however, be the beneficiary of a qualifying participant’s HRA coverage if he or she is the qualifying participant’s spouse, tax dependent or child under age 27.

Comparing HRAs to HSAs

Although self-employed individuals can’t receive tax-free HSA contributions through a cafeteria plan, at least they can have HSAs. This relative advantage has led some employers to favor HSA programs over HRAs.

But HRAs have other advantages for employers, including more control over how amounts are spent and typically lower costs relative to the nominal amount of benefits provided. (While the full HSA contribution must be funded with cash, HRAs typically are notional accounts that need only be funded when participants incur expenses, and not all participants will incur expenses up to the limit established by the employer.) Thus, the decision can seldom be made based on the participation rules alone.

Going in smart

Controlling costs remains a challenge for most businesses that offer health care benefits. An HRA may be a feasible solution, but make sure you know all the rules going in. Our firm can help you choose health care benefits that suit you and your employees.

Like most businesses, yours probably has a variety of physical assets, such as production equipment, office furnishings and a plethora of technological devices. But the largest physical asset in your portfolio may be your real estate holdings — that is, the building and the land it sits on.

Under such circumstances, many business owners choose to separate ownership of the real estate from the company itself. A typical purpose of this strategy is to shield these assets from claims by creditors if the business ever files for bankruptcy (assuming the property isn’t pledged as loan collateral). In addition, the property is better protected against claims that may arise if a customer is injured on the property and sues the business.

But there’s another reason to consider separating your business interests from your real estate holdings: to benefit your succession plan.

Ownership transition

A common and generally effective way to separate the ownership of real estate from a company is to form a distinct entity, such as a limited liability company (LLC) or a limited liability partnership (LLP), to hold legal title to the property. Your business will then rent the property from the entity in a tenant-landlord relationship.

Using this strategy can help you transition ownership of your company to one or more chosen successors, or to reward employees for strong performance. By holding real estate in a separate entity, you can sell shares in the company to the successors or employees without transferring ownership of the real estate.

In addition, retaining title to the property will allow you to collect rent from the new owners. Doing so can be a valuable source of cash flow during retirement.

You could also realize estate planning benefits. When real estate is held in a separate legal entity, you can gift business interests to your heirs without giving up interest in the property.

Complex strategy

The details involved in separating the title to your real estate from your business can be complex. Our firm can help you determine whether this strategy would suit your company and succession plan, including a close examination of the potential tax benefits or risks.

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Do You Have Your Own Wealth Management Plan?

The Importance of S Corporation Basis and Distribution Elections

Fun Fact: Exactly What Does FDIC Deposit Insurance Cover?

Infographic: Capital Gains Tax Can Take a Bite Out of Your Investments

This Year End, Update the Financials in Your Business Plan

Putting Together the Succession Planning and Retirement Planning Puzzle

Deciding Whether a Merger or Acquisition is the Right Move

Could You Unearth Hidden Profits in Your Company?

Some Business Owners Can’t Participate in Their Own Companies’ HRAs

Your Succession Plan May Benefit from a Separation of Business and Real Estate

Tax Deadlines: April 2026

Should Your Business Consider a Fiscal Year End?

Business Deductions for Four-Legged Coworkers

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